Openfinance Insights

Digital Securities: The Key for Unlocking Liquidity in Alternative Assets?

For participants across the alternative asset industry, the rise of digital securities is poised to deliver what’s long been missing from the private securities market: liquidity.

The prospect of liquidity is welcome news for those familiar with the notoriously complex and inefficient world of private investments. These complexities have created a highly illiquid environment that prevents investors and issuers from unleashing the full value of the alternative asset market, which is expected to climb to $14 trillion in the next five years.

By addressing many of the challenges that come with investing in assets like real estate, private equity and venture capital, digital securities are transforming the market for investors and issuers alike. With new providers and platforms entering the space, the rapidly expanding ecosystem for digital securities will be key for finally solving the alternative asset market’s liquidity problem.

New Format, New Opportunities

While digital securities are still a new concept for much of the industry, they’re simply a digital representation of the same assets people have invested in for generations. Unlike utility tokens, digital securities are regulated ownership stakes, backed by an asset with measurable value. These securities break down alternative assets like real estate or rare artwork into tradable units, making traditionally illiquid investments easier to buy and sell.

In addition, digital securities offer an efficient alternative to the traditional market’s outdated infrastructure. For decades, the alternative asset industry has relied on paper-based workflows, manual data reconciliation across a slew of intermediaries, and clearing and settlement processes that can take weeks to complete. These inefficiencies make buying and selling assets a challenge, to say the least, often forcing investors to hold assets for years beyond their desired duration or sell them at steep discounts.

Digital securities replace this outdated approach with highly efficient digital processes, streamlining the investing process while enforcing all relevant regulations automatically. Awareness and adoption are growing across the industry, with last year’s sale of $18 million in digital securities for the St. Regis Aspen Resort an early high-profile example of the move toward digital ownership of alternative assets.

Growing Potential for Investors and Issuers

For both investors and issuers, digital securities present a tremendous opportunity to unlock value from private investments via an efficient secondary market. By streamlining the exchange of these traditionally illiquid assets, digital securities offer:

Broader investing opportunities. While many private investment opportunities have traditionally only been available behind closed doors, both accredited and non-accredited investors can now access an array of digital securities instantly through online trading platforms. Fractional ownership also makes it easier to diversify across a variety of assets. For issuers, the digital format enables them to reach a much wider base of global investors to raise capital.

The potential for higher valuations. Finding a buyer willing to pay a fair price for an alternative asset, like a piece of art, has historically been a tough task for investors. Dividing that asset up into tradable securities makes buying and selling simpler — and means investors are more likely to pay market price. While digital securities aren’t likely candidates for high-frequency trading, investors have an opportunity to improve their position by achieving fair value for their assets. That valuation premium extends to issuers, too. Since investors know they can fetch higher values on the secondary market, they’re likely more willing to pay more for these securities during the initial offering.

Lower trading costs. By eliminating middlemen and manual processes, digital securities reduce the time and costs typically involved in exchanging alternative asset investments. In addition to lower service fees, investors and issuers can also avoid the opportunity costs of having capital tied up in escrow for weeks.

While digital securities offer a path to long-overdue liquidity for alternative assets, that path will depend on having the right infrastructure in place. Trading platforms like OpenFinance, which allow investors to buy and sell these securities easily and securely, will be essential for creating a truly liquid marketplace, CEO Juan Hernandez told Forbes earlier this year. That liquidity will grow alongside continued interest and investment in digital securities, bringing new opportunity to a market ripe for change.

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